⏳File 2023 taxes and minimize IRS late fees now!
Home › Business › Organization › C Corp
C Corporations: A Strong Incorporation Option For Your Business
C Corporations: A Strong Incorporation Option For Your Business
Deciding how to incorporate your business can make a big difference down the road. From understanding taxes and regulations to ensure your business grows, a lot is weighing on your decision. There are different entity types when it comes to incorporating, and each has its pros and cons depending on business needs and goals.
Table of contents
What is a C Corp?
The C Corp definition is a type of business owned by shareholders and is ruled by the laws established by the shareholders. Shareholders and business owners are taxed separately from the C Corporation. If you establish a C Corporation, your shareholders are required to vote on a board of directors and hold annual meetings.
Some examples of C Corporations include Apple, Walmart, McDonald's and Starbucks.
How to start a C Corp
Starting a C Corporation can seem like a daunting task. However, there are a few things to keep in mind to make for a smooth process.
First, you need to give your business a unique name and appoint officers, including a board of directors and a CEO. Then you’ll need to draft the articles of incorporation with your secretary of state and write the company bylaws.
Next, you’ll need to issue stock and apply for a business license at the municipal, county and state levels. Lastly, file Form SS-4 to secure your employer identification number (EID) from the Internal Revenue Service (IRS), along with any other ID numbers based on your state’s requirements.
C Corp Taxes
No one likes paying taxes, especially double taxes. C Corps belong to this special double taxation tax category. With double taxation, the corporation pays taxes on its earnings and dividend taxes are paid by the shareholders.
The federal corporate tax rate is 21%. C Corporations need to complete two tax forms. The 1099 tax form, 1099-DIV, goes to each shareholder, which gives a summary of the profits distributed to them. Form 1120 reports the taxable earnings, tax deductions and gross income.
The two types of dividends are qualified and nonqualified. Qualified dividends have a lower tax rate but, must be paid to shareholders from qualifying US or foreign corporations. Also, following the 120-day holding-period return, the shareholder needs to hold the stock for at least 60 of the 120 days.
Nonqualified dividends don’t receive any special tax privileges and don’t meet the standard dividend requirements. Some types of dividends are automatically considered non-qualified.
There are a few ways to avoid double taxation. Instead of distributing the income earnings to the shareholders as dividends, simply withhold the earnings. This option is only available if you’re able to reinvest the investments into the company.
Or, you can distribute income as a bonus or salary instead of dividends. The bonus or salary payments are tax deductible for the C Corporation, but the recipients will be taxed. Lastly, taking only a portion of the company’s profits as salary and leaving the rest as reinvestment will lower both the taxable income for the corporation and the owner’s total income, reducing the overall tax amount. But you'll still be expected to make estimated tax payments.
Benefits of a C Corp
Raising numerous rounds of venture capital is usually necessary for startups. This will help the company reach its targets for growth and size. Usually, institutional investors and venture funds will only invest in C Corps for a variety of reasons, but the tax structure is usually a driving force.
For startup companies, programs like incubators and accelerators are great ways to receive support in many areas like funding, investor access and product development. But these programs prefer C Corporations over other types of entities.
C Corps can offer equity incentive plans, including stock options, to employees. Providing insensitive plans can instill a desire for the company’s long-term success and attract and retain talented individuals.
If you want to bring on advisors to help guide the company during certain milestones, stock options are usually the option for compensating the advisors. C Corps have the power to distribute those stock options.
The qualified small business stock amendment (QSBS) was passed in 1993 in 2009 to make C Corps the first and only entity to receive eligibility. The QSBS allows small business owners to be exempt from paying capital gains tax on certain stock sales if they held their shares for five years or more.
When to incorporate as a C Corp
There are several reasons why a C Corp might be the right choice for your business.
Protection
Lasting business
Limited budget
C Corporation vs S Corporation
It can be difficult to know which type of corporate entity to choose. There are pros and cons when comparing a C Corp vs S Corp. A C Corporation is the standard option or default option with the IRS. But with an S Corp, the corporation has opted to apply for a different tax status.
Let’s break down the similarities between a C Corp vs S Corp. Both get their names from the chapter in the IRS code in which they’re taxed and are considered separate legal entities. Also, you can get limited liability protection with either option so shareholders won’t be responsible for business debts. Finally, C Corps and S Corps have similar structures meaning they have directors, members and shareholders.
However, there are some stark differences between a C Corporation vs S corporation. When it comes to taxes, a Corp is taxed at the corporate level and files a corporate tax return, facing double taxation. On the other hand, since S Corps are pass-through entities, they file Form 1120-S, which is used for informational purposes only. So the income distribution to shareholders is taxed only at the individual level.
C Corps have freedom when it comes to company shareholders, whereas S Corps have a lot more restrictions in place, like having no more than 100 shareholders. Thanks to the Taxes and Jobs Act of 2017, S Corpshareholders can get a 20% business income deduction.
Depending on your business priorities and goals, choosing a C Corp may be the better option than an S Corp.
C Corp vs LLC
There’s no denying that starting and managing an LLC is much easier than other corporations. Since the process is started under state law, the process of forming an LLC depends on the individual state’s law.
When it comes to LLCs and taxes, the IRS doesn’t view them as one unit. Instead, members have the freedom to choose the way they’re taxed. They can be taxed as a sole proprietorship, a corporation or a partnership. But they do have to pay self-employment taxes, including Social Security and Medicare. C Corporations are taxed separately from the owners and pay corporate income tax.
An LLC-company can’t offer stock options, and all the profits are distributed to the members. However, a C Corporation has the option to keep the profits within the business and distribute dividends as payment to the shareholders.
Both entities have powerful legal advantages, which help protect assets from creditors and provide protection against legal liability. When it comes to choosing between a C Corp vs LLC, it comes to which option is better suited for your business goals.
What’s FlyFin?
FlyFin caters to the tax needs of freelancers, gig workers, independent contractors and sole proprietors.
But anyone can file taxes through FlyFin! FlyFin tracks all your business expenses automatically using A.I. to find every possible tax deduction.
Then, the CPA team files a guaranteed 100% accurate tax return for you – to save you a couple thousand dollars and a ton of time on your taxes.
Download the FlyFin app and have your taxes filed in less than fifteen minutes, saving time and more money on your taxes than last year, guaranteed.
Expert tax CPAs ensure 100%-accurate tax filing
A.I. finds every tax deduction, eliminating 95% of your work
On average users save $3,700
Was this tip useful?
Yes
No